Don’t Pay For Make Work; Make Work Pay

If you want to understand why I’m happy to write for TAC, just read Ron Unz’s brief for a dramatic rise in the minimum wage. He’s been making this argument in these pages for some time now, and I hope he continues to beat this particular drum.

I hope so for reasons of principle and for practical reasons. In principle, any kind of “one-nation” conservatism has to care about inequality as such, and particularly about the weakness of labor’s bargaining power in most of contemporary America. Right-wing individualism is often conflated with a conservative approach to governance in contemporary American politics, but that conflation is a profound error. As a practical matter, I’m convinced that wage stagnation is the deep reason for the financial crisis. The Bush-era answer to stagnating wages was cheaper credit. That papered over the problem for a while, but it teed America up for a terrible crash. (Harper’s Canada, having dodged that crisis, may be heading for a similar crisis of their own now.) Avoiding a repeat requires fixing the structural drivers of widening inequality, and particularly means raising wages at the low end of the scale. In that context, a legislated rise in the minimum wage should absolutely be on the table for discussion.

That doesn’t mean I don’t see potential problems with Unz’s argument. Ultimately, the only way a hike in the minimum wage “works” is if it creates incentives to increase labor productivity. In the absence of such incentives, it may be rational for an individual employer maximally to exploit his bargaining-power advantage even if it’s to the detriment of the economic collectivity. That’s the way things work in slave economies, and it’s the way Marx assumed capitalism would evolve.

A mandated increase in wages could produce those incentives in various ways. If it led to an overall rise in prices, that could drive out competitors who followed a model of competing entirely on price, and skimping on quality. Or industries could respond by increasing automation, which would reduce head-count but would increase productivity per worker-hour. Or some jobs could move overseas – which could also increase efficiency, particularly if those were jobs that would otherwise be filled by low-skilled immigrants. That would also improve efficiency if it costs less to move capital than to move labor. All else being equal, those effects would increase unemployment in the short term while improving economic performance over the longer term – but under current conditions, where overall demand is low, an increase in the minimum wage would amount to redistribution to those most-likely to consume, which would mean an increase in demand, so I’m not sure you wouldn’t actually see a net drop in unemployment overall.

But some sectors will find it harder to increase productivity than others – or will have weaker incentives to do so. One sector that could be particularly problematic is health-care. From orderlies to receptionists to janitors to home health-care aids, there are an awful lot of low-wage employees in the health-care sector. But so much of health-care spending is socialized that the incentives to innovate in response to a mandated rise in wages are not as operative. The initial impact of a hike in the minimum wage would likely be a spike in health-care inflation, which would, given the way Medicare and Medicaid work, lead to an immediate spike in Federal spending, and an increase in the structural deficit.

That’s not necessarily an argument not to raise the minimum wage – but it’s an argument that a hike in the minimum wage would be more effective if combined with efforts to improve productivity in the sector, which, given how enmeshed the government already is, will require government initiatives.

And that’s an argument that can be generalized beyond health-care. Although America has relatively weak unions, and a highly mobile labor force, we don’t exactly have a hands-off policy toward business regulation. Indeed, as we have gotten more tax-phobic, we’ve become more and more inclined to achieve our social goals through regulation of the private sector, and through a “socialism in one contract” approach by those unions that are relatively strong (such as public-sector unions). Regulatory reform could work hand-in-hand with a hike in the minimum wage: the latter providing the incentive to innovate to maintain profitability, the former increasing the scope of opportunity to do so.

These kinds of reforms are going to be particularly important to the small-business sector. Large businesses are going to be in a better position than small ones to rationalize their operations in response to a significant change in labor costs, both because they are likely to have more flexibility in financing during the transition and simply because they will have more moving parts to play with. A hike in the minimum wage would disproportionately impact small businesses. It would make sense to couple it with a pro-labor reform that would disproportionately benefit small businesses – such as a permanent cut in the employer portion of the payroll tax (offset by an increase in taxes on consumption, such as a VAT or carbon tax).

Moving to another part of Unz’s argument, Unz points out a number of problems with the traditional “more education” prescription for solving the problem of stagnating wages. And he’s right that a rise in wages for relatively low-skilled labor would reduce incentives to marginal students to go to a four-year college, which would help relieve some of the upward pressure on education costs. But a rise in the minimum wage will also produce incentives for businesses to reduce the use of unskilled labor, which will produce higher demand for opportunities to rise from “unskilled” to “semi-skilled.” This is the sort of thing that community colleges focus on, and expanding the number of slots for associates degrees would be valuable. But it would also be valuable to push back against credentialism at this level as well, to open up space to acquire – and demonstrate – useful skills without having to participate in a formal degree program. There should be more scope to demonstrate specific competencies simply by passing a test, and then let a thousand test-prep flowers bloom.

My larger point is this. Wage stagnation is a serious economic and social problem with far-reaching consequences. You don’t get to say “I don’t care about that problem” because your ideology doesn’t have a ready-made answer. That applies to free-market-oriented conservatives and client-service-oriented neo-liberals alike, because solving the problem is going to require solutions from the “left” and “right” side of the policy box, and these solutions may be more complementary than contradictory. Using government power to increase the negotiating leverage of labor in the market is more likely to increase wages without taking those gains back through inflation if business owners have more freedom to respond creatively to an increase in labor costs. Giving business more freedom to respond creatively to an increase in labor costs is more likely to result in gains to labor, rather than just increased rents for capital and the businesses that service capital, if the government acts to increase labor’s negotiating leverage in the market.

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15 Responses to Don’t Pay For Make Work; Make Work Pay

I don’t know how, I won’t hold my breath waiting for it, but the first discussion needs to be the morality of profits.

After getting the “It’s evil!” fringe out of the way, there are two main camps. One camp wants to force investment risk into irrelevancy, a sort of Marxism without using that word. The other camp wants no limits, and no restrictions on any policy, tactic or practice that maximizes profits.

The sane position — the moral position, I personally insist — is somewhere in between. Workers need to return to sanity concerning borrowing to buy, and their wages need to increase to a sane level that accomplishes the gentle, positive feedback necessary to sustain consumer products and services. On both sides, we need a sane approach to wealth creation that acknowledges the difference between enough — a living wage that leaves room for discretionary spending, a rational return on investments in proportion to risk — and the currently ubiquitous “I got mine, the rest of you can go pound sand.”

It’s not a perfect description, but the balance is a zero-sum game. Right now, we are moving steadily towards a very few with nearly 100%, and the rest fighting over the dregs. At some point, we will either have a violent redistribution (one hopes short of physically), or we will see the few come to their senses and stop expecting to get theirs first.

Globalization and automation displace waves of workers. I was just reading that manufacturing jobs in the US are at WWII levels. That while US output is at an all-time high. Globalization and automation. Onshore machines assemble cheap offshore parts.

Unless you want to get in and tell Ford they can’t use robots, or that they must source all components onshore, you can’t ensure employment.

Oh, you can encourage and prepare workers for the remaining slots, but you aren’t really guaranteeing some sort of employment-population ratio. No, you must accept that a dole is the only humane answer for those workers who don’t make the cut to a downsized workforce.

(“Today’s Michigan and Missouri built F-150 bears only 60 percent domestic content rating.” ‘course, if you are a pessimist you might think that’s pretty good.)

I support Unz idea, personally. It is the simple solution, and the one most in touch with human nature. There are many more things to do: the fact that there are 65 million Americans with a “criminal record” also factors into this problem. I’m not sure what 20% of the population has been arrested for, but I bet it makes it a lot harder to get a job.

I will take issue with the idea that income inequality had anything to do with the financial crisis. The real issue is, too many old people with money, not enough young people who are good credit risks. Which is why you see the same thing across populations with the Western Disease.

Given that income taxes will go up and government services will reduce with another rise of minimum wage, I believe that we may find it possible to give those pro-small business incentives with, at most, a small push for some other form of compensation. Bah, I bet just balancing the corporate tax rate (remove deductions that result in extremely off balanced tax rates among different companies while reducing the overall rate) would be enough to pay for it. Perhaps also reducing the cost employers pay to unemployment depending on the size of their workforce, now that any full time job is enough pay for individuals.

I’m not so sure about fixing the community college angle by offering testing systems. Education requirements are set by the companies involved. As such, supplying any alternative system that gets rejected by the industry would be a waste of time.

Unless…there’s a rather harsh option. The Left in me rages about it but…

Companies will start demanding their ‘semi-skilled workers’ as you say. That demand will be satisfied by grants and loans given to community colleges. The high supply of ‘semiskilled’ will solidify the requests companies make, thus turning into the danger situation you suggest.

So the option: reduce/eliminate non Bach-Associates grant. I cringe writing it but a question: How many job opportunities are left that can be fully satisfied with just ‘coursework’? As such, if the only way to get funding is via a program that results in the person being overqualified (associates degree required for janitorial work!) then apply a government funded training/testing system, you end up with two events:

1. Invididuals without employment have a lower cost method of switching professions/industries, allowing for the work force to move from overpopulated to high demand fields.

2. Companies will be starved of Degree based workers, as those with the degrees won’t want to work for $12 without leaving on the first instance of a higher paying job. Meanwhile, a mass of Test trained individuals will come on all looking for that job.

That might work out. Worst case is that companies succeed in pushing everyone into Degree learning anyway somehow, but that can only happen if we continue the cultural “College or bust” mentality we’ve fed everyone for a good long time. Higher education funding reform will also help, though I am afraid of what that sort of reform will mean (for now I can safely say that it’s’ “a matter for another article”)

Why not replace payroll taxes completely with a carbon tax+sugar tax. It would be the equivalent of a raise and make labor cheaper for employers. Taxing carbon would incentivize increased efficiency and taxing sugar would incentivize less caloric consumption that has all sorts of negative externalities.

You mention Marx assumed capitalism would evolve into a slave economy. I would argue Smith, in his statements about the need for Labor to have an equitable share in production, would agree. Proponents of the mythical free market talk about the the benefit of so called animal spirits. Take animal spirits too far and you get the Lord of the Flies. And I say mythical since there has never been any such thing as a true free market in a developed society. Any time preferential treatment can be bought through legislation, the market ceases to be free. Government should take a position on the side of Labor to induce a more equitable share of production. Otherwise, the Right’s fear of a continued evolvement into the welfare state will be realized. If Labor isn’t participating in production gains and all the profits are going up instead of out, Government is the only entity that can make up the difference, ie, higher taxation and transfer payments.

States are currently having issues funding their transportation projects. A big reason: They’ve been relying on the gasoline tax to fund them. As people became efficient in handling gas with fewer trips and more efficient cars, the income from the tax has dropped considerably.

Moral: Best not to put your faith on taxing a product we’re seeking to reduce.

The benefit of payroll taxes, sadly, is that as people continue to ‘do what’s right’ incomes should increase, thus providing more revenue. Items like a carbon tax become less useful the more people control and eliminate carbon emissions (doing the ‘right thing’). Same goes for sugar and, really, the cigarette tax.

The sales tax actually has a similar issue: the more people save and avoid overspending, the less useful the tax is.

Not to say you can’t have these taxes, but if the goal is revenue increases rather than influencing how people act, then it’s best to place taxes on items that increase with responsible actions, not decrease.

Where is the data to support that statement? The minimum wage has declined in relation to inflation since the late 60’s peak. Wealth distribution is skewed upwards at a level not seen since just prior to the Great Depression. With more women entering the workforce over the last forty years and two earners defining household income rather than one as in previous generations, and yet discretionary income still isn’t what it once was when single earners could support a household, I can’t see the logic in your comment. That’s not an attack on your position, just a request for better understanding.

“I don’t know how, I won’t hold my breath waiting for it, but the first discussion needs to be the morality of profits.”

yes it does. it seems that the concept of maximizing profit is the one non-negotiable item in the economic discussion. yet while there is much (correct) talk of government controlling lives, there is little talk of corporations/ management controlling lives through an ineluctable drive for profit.

“This is a problem with a simple time tested solution that works: Unionization. ”
but the unions have to become real “International” unions, as they like to call themselves.

Sal, thanks for supporting my main point. I would add that unions were the response to ubiquitous immorality amongst corporations in post-Civil War America (which included one presidential impeachment), and their decline in recent decades begs a personal question: Do we really need to see the resurrection of the “company town” before reining in modern corporations’ variations on that same immoral view of workers?

… and I would add, with perhaps egregious cynicism, that Walmart is the first corporation to establish company towns around its stores. An arguable view, to be sure, but one I have witnessed for myself.

How does the creation and expansion of the EITC factor into the analysis of the minimum wage over time?

I get that the inflation-adjusted minimum wage has fallen from its ’68 peak. But the EITC was created in 1975, specifically to make work pay, right? It was expanded under Clinton. If you factor in the EITC and other tax code changes (mostly the payroll tax hikes in the 80s and the Bush tax cuts), what’s the net effect? Is it still downward?

Because if it’s not, then the problem lies elsewhere (hint: overseas, where labor is just so cheap that we can’t cut or deregulate our way around it).

The problem with the EITC or any other governmental support as such, is a socialization of private costs. Essentially, we’re subsidizing Capital’s low pay structure in a public manner. Globalization is a key issue, but do we combat it by increasing governmental assistance, which is by definition a form of wealth transference, or do we re-look at tariff enforcement, or is raising the minimum wage a first step in re-leveling the Capital/Labor structure that seems to have been weighted as Capital heavy over the last 40 years? We’re all “takers” in a way when you look at the intended and unintended consequences of complex tax and legislative policy. Some simplification is in order to strip the unearned benefits others receive through complexity.